Chargeback Ratio: the 8 Most Important Things to Know
Do you know your chargeback ratio? This isn’t something to take lightly; even a slight, temporary change in this number can be costly.
In simple terms, your chargeback ratio is a metric that compares your sales to the number of chargebacks you receive each month. Careful monitoring and analysis of this stat can provide a wealth of helpful information. Knowing all that, it’s surprising that so many merchants have only a vague understanding of how chargeback ratios work.
- Chargeback Ratio
A chargeback ratio is a number comparing the total sales a merchant processes each month with the number of chargebacks the business received during the period in question. Each card brand calculates merchants’ chargeback ratios differently.
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Sounds simple, right? Well, as you probably guessed, there’s more to it than that. In this post, we’ll look at the seven most important things you need to know about your chargeback ratio.
Your chargeback ratio is the same as your chargeback rate
One of the more confusing aspects of the chargeback ratio as an indicator is that it’s known by multiple names. Some call it a chargeback-to-transaction ratio, while others call it a chargeback rate. It is officially known as a chargeback-to-transaction ratio, or sometimes as a chargeback-to-sales ratio. Both terms are accurate descriptors of the basic idea.
The most important thing to remember is that the terms are interchangeable. They all refer to the same thing: a measure of chargebacks as a portion of sales.
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Your chargeback ratio is based on a very simple equation
The basic concept of the chargeback ratio is simple. To calculate your figure, simply divide the number of chargebacks in a given period by the number of transactions in a given period. For example:
That’s about as close to a “standard” formula is we can get. While the calculation itself is simple, coming up with the numbers to calculate can be a little trickier.
You have a different chargeback ratio for every card brand
The card networks all use the above formula for calculating your chargeback rate. The data source for that formula, however, can make a huge difference.
Visa divides by the number of transactions processed by the number of chargebacks filed during the same month. In contrast, Mastercard divides by the number of transactions processed by chargebacks filed in the previous month. This chart helps illustrate the difference:
Discover and American Express determine your chargeback ratio the same way Visa does. Still, you’ll have a different chargeback rate for each card scheme because each brand only counts the transactions conducted on its own network. In other words, Visa only counts Visa transactions and chargebacks from Visa cards.
Your chargeback ratio isn’t just about chargebacks
Your chargeback ratio can be a key performance indicator (KPI) for your business. Analyzing your ratio data based on different values—the issuing bank, the cardholder’s geographic location, the type of merchandise being disputed—will give you a different perspective on the causes and sources of your customer disputes. In turn, you can use this data for more informed decisioning.
To illustrate, let’s say that you notice your chargeback rate is considerably higher for purchases originating from a certain country or region. If you believe this is indicative of a widespread fraud problem in that region, you might decide to stop selling there. Or, if a set of products seems to generate more customer disputes, you might decide to remove those items from your inventory.
It can be tempting to try and analyze your chargeback ratio based on reason codes. This is usually a bad idea, though, as the reason codes used by banks are notoriously inaccurate. The true sources of chargebacks may have nothing to do with the reason code that was used.
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A high chargeback ratio can cost you
Chargeback ratios come with a limit. If you breach that threshold, you risk fines, higher processing costs, and even the loss of card processing rights. As we’ve seen, however, your chargeback threshold can vary based on the card network, as you’ll have a different ratio to manage with each brand you accept.
It’s possible to be under the threshold for one network while breaching your threshold on another. Visa sets their standard threshold at 0.9% of monthly transactions using the formula outlined above. However, their “Early Warning” threshold sits at 0.65% of monthly transactions, while the “Excessive” threshold is 1.8%.
For Mastercard, their “Chargeback Monitored Merchant” status has a threshold of 100 chargebacks per month and a ratio of at least 1%. For their “Excessive Chargeback Merchant” designation, the standard is at least 100 chargebacks per month and a ratio of at least 1.5% for two consecutive months.
If your chargeback-to-transaction ratio sits above the acceptable threshold, you could be labeled a “high-risk merchant.” You’d be required to join a chargeback monitoring regime, like the Visa Dispute Monitoring Program (or VDMP). This typically involves higher processing costs while you attempt to resolve the situation.
If things go on with no sign of improvement, the network may simply cut its losses and revoke your processing privileges. That means you lose the ability to process transactions for that card brand altogether, at which point your only alternative will be to secure a high-risk merchant account.
If there’s a silver lining, it’s the fact that only first chargebacks count toward your total. If the issuing bank files a second dispute—also known as a pre-arbitration chargeback—it will not count against your ratio.
Your acquirer is watching you, too
Your acquiring bank serves as your representative to the card networks. The acquirer can process payment card transactions on your behalf, but unfortunately, it can also be penalized if your chargeback situation gets out of hand.
Acquirers are ultimately liable for every merchant with whom they do business. If your merchant chargeback liabilities exceed the amount available in your account, your bank would be responsible for covering the shortfall. If you accrue too many chargebacks, the network could fine your acquirer up to USD $500 per day for each of the first 15 days…and up to USD $1,000 per day thereafter until the issue is resolved.
Here’s a sample illustration of the fees an acquirer could be expected to pay in a quarter, due to one merchant’s poor Mastercard chargeback management. Even though these fees are levied against the acquiring bank, rest assured the costs will be passed on to you (along with a healthy markup).
|Month||Issuer Reimbursement (USD)||Assessment (USD)||Total|
The Visa Dispute Monitoring Program is similar, with Visa charging up to US $100 per chargeback for high-risk merchants. It’s easy to see why an acquirer might cut its losses and close your account before the card brand steps in.
Visa and Mastercard have rigid chargeback limits that can apply to acquirers. However, banks and processors may enforce stricter rules if it’s in their best interests. If you have a merchant account with Stripe, for example, the company has the right to impose a chargeback limit of 0.75% of monthly transactions per card brand if they choose.
You CAN manage your chargeback ratio
If your chargeback ratio consistently climbs above the network’s threshold, you may still be able to operate…but the conditions won’t be great. Your better off working to keep your chargeback ratio as low as possible. That requires a long-term comprehensive strategy to manage chargebacks.
Despite what some merchants believe, many chargebacks—between 60% and 80%—are potential cases of friendly fraud. You have the right to challenge these invalid chargeback scams through the representment process. If you challenge a customer dispute and win, you can recapture a portion of the amount disputed.
Unfortunately, this is a time-consuming and expensive process for everyone involved. Also, it will not undo the damage regarding your chargeback rate. This is because your chargeback ratio is calculated using the total number of chargebacks issued, regardless of whether they get reversed later.
You can reduce your chargeback ratio by adopting ten simple best practices
It’s crucial that you do everything in your power to prevent chargebacks before they happen. To keep a lower chargeback rate, you must address each chargeback by its fundamental source: merchant error, criminal fraud, or friendly fraud.
There are dozens of best practices you can deploy to keep your chargeback rate at a healthy figure. However, here are ten of the most important practices to implement:
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What is a chargeback ratio?
Your chargeback ratio is a metric that compares the total number of transactions you process against the total number of chargebacks you receive.
How is my chargeback ratio calculated?
The number of chargebacks in a month is divided by either the number of transactions processed during that same month (Visa) or by the number of transactions in the previous month (Mastercard).
What is an acceptable chargeback ratio?
What’s considered “acceptable” varies depending on the card brand. For Visa, the threshold is 0.9% of transactions. For Mastercard, the threshold is 1% of chargebacks and 100 chargebacks per month.
What happens if my chargeback ratio gets too high?
Chargeback ratios come with a limit. If you breach that threshold, you risk fines, higher processing costs, and even the loss of card processing rights.
Who determines the chargeback threshold?
The chargeback thresholds are set by the card networks. Visa, Mastercard, Discover, and Amex all have their own guidelines for acceptable chargeback ratios, and how to calculate the figure in question.
How can I keep my chargeback rate low?
The only real solution is to develop a comprehensive strategy to fight existing chargebacks and to prevent as many future chargebacks as possible. Generally, the most efficient approach is to work with a chargeback management company to reduce risk.